Management Accounting Aspects BRA5TR2 (MBA)/BRA4TR2 (BBA)

INDIVIDUAL ASSIGNMENT

DUE DATE: 17 July 2012

No of Case Studies: 4 Page total: 12 (inc cover page and Annexures) Annexures: A & B

CASE 1 JOB ORDER COSTING: 20 Minutes

Terri Ronsin had recently been transferred to the Home Security Division of National Home Products. Shortly after taking over her position of divisional controller, she was asked to develop the divisions predetermined overhead recovery rate (POHR) for the upcoming year. The accuracy of this rate is important as it is used throughout the year and any over or underapplied overhead is closed out to cost of sales at the end of the year. National Home Products uses direct labour hours in all divisions as the allocation basis for manufacturing overheads. To compute her POHR she divided her estimated total manufacturing overheads for the coming year by the production managers estimate of total labour hours for the following year. She took her computations to the divisions general manager (Mr Jay Irving) for approval. She was very surprised when he suggested a modification in the base. Her conversation with the general manager went like this: Ronsin: Here are my calculation for the predetermined overhead recovery rate for next year.If you are happy with the rate we can enter the rate into our system on 1 January and be up and running on our job order costing system from day one. Irving: Thanks for coming up with the calculations so quickly and they look just fine. There is, however, one slight modification I would like to see.Your total of direct total hours for the year is 440,000 hours. How about cutting it to 420,000? Ronsin: I do not know if I can do this. The production manager says that he will need 440,000 direct labour hours to meet the sales projections for the year. Besides, there are going to be over 430,000 direct labour in this year and the sales projections are higher for next year. Irving:

Terri I know all that. I would still like to reduce the hours to about 420,000. You do not probably know that I had an agreement with your predecessor to shave 5% or so off the estimated direct labour hours every year. That way, we kept a reserve that usually resulted in a boost to net operating income at the end of the fiscal year in December. We called this our Christmas bonus. Corporate always seemed as pleased as punch that we could pull off such a miracle at the end of the year. This system has worked for many years and I do not want to change this now.

REQUIRED: 1) Explain how shaving off the estimated direct labour hours in the base for the predetermined overhead recovery rate usually results in in a big boost in net operating income at the end of the fiscal year? 2) Do you think that Terri Ronsin should go along with the General Managers request? Explain your reasoning.

CASE 2 STANDARD COSTING: 40 Minutes

You have recently accepted a position with Virex Inc. The manufacturer of a popular consumer product. During the first week of your new job, the vice-president has been favourably impressed with your work.He has been so impressed that he calls you into his office and asks you to attend the executive committee meeting tomorrow morning with the purpose of leading a discussion on the variances reported for last month. Eager to impress you take the variances and supporting data home in order to preapare yourself for tomorrow. On your way to work this morning, the papers were laying on the seat of your new, red convertible. As you were crossing the bridge on the highway to work, a sudden gust of wind caught the papers and blew them off the bridge into the river below.You did however manage to retrieve one page that contained the following information: ------------------------------------------------------------------------------------------------------------STANDARD COST CARD Direct materials, 6 kgs at R3.00 per Kg. Direct Labour, 0.8 direct labour hrs at R 15.00 per hr. Variable man overheads,0.8 direct labour hrs at R 3.00 per hr
VARIANCES REPORTED Price/ Qty/ Rate R 6,900 F 14,550 U 1,300 F Efficiency R 9,000 U 21,000 U ? +

R 18.00 R 12.00 R 2.40

Direct materials Direct labour Variable man o/heads

TOTAL STD COSTS * R 405,000 270,000 54,000

* +

Applied to Work in Process during the period Entry illegible

You recall that the manufacturing overhead cost is applied to production on the basis of direct labour-hours and that all the materials purchased during a period were used in production. All inventories are insignificant and can be ignored.
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A further figure that you remember seeing on a summary sheet was that the total variances added up to R 40,000 unfavourable in the month.

It is now 8.30 am. The Exec Committee meeting starts in one hour; you realise that to avoid looking like an idiot you must somehow generate the backup data for the variances before the meeting begins. Without this backup data it would be impossible to lead the discussion or answer any questions.

REQUIRED: 1 Calculate how many units were produced last period? 2 How many kgs were purchased and used in production, in the period? 3 What was the actual cost per kg of material? 4 How many actual labour hours were worked during the period? 5 What was the actual rate paid per direct labour hour? 6 What was the actual variable overhead cost incurred in the period? 7 If asked in the meeting, What are the advantages and disadvantages/pitfalls of us continuing the use of a Standard Costing system. What would your answer be?

CASE 3 COST-PROFIT-VOLUME ANALYSIS 30 Minutes

Ian Smith is an internationally known professor specialising in consumer marketing. In 2007, Smith and the Best Business School (BBS) agreed to conduct a one-day seminar at BBS for marketing executives. Each executive would pay R 2,600 to attend the one day seminar. The dean of BBS indicates to Smith that the nonspeaker related fixed costs for BBS conducting the seminar would be: Advertising in magazines Mailing of brochures Administrative labour at BBS Charge for BBS lecture auditorium R 40 000 R 30 000 R 20 000 R 10 000

The variable costs to BBS for each participant attending the seminar would be: Meals and drinks R 250 Binders and photocopying R 350 The dean of BBS initially offered Smith its regular compensation package of a) business-class airfare and accommodation (R 30 000 maximum) and b) a R 20 000 lecture fee. Smith would is happy with the R 30 000 maximum allowance but feels that the R 20 000 lecture fee does not provide him with enough upside potential if the seminar is well attended. Smith suggests instead, that he receive 50% of the operating income to BBS (if positive) from the one-day seminar and no other payments. The dean of BBS quickly agrees to Smiths proposal after confirming that Smith is willing to pay for his own airfare and accommodation and deliver the seminar irrespective of the number of executives signed up to attend. REQUIRED: 1) What is BBSs breakeven point ( in number of executives attending) if: a) Smith had accepted the regular compensation package of R30 000 expenses and a R 20 000 lecture fee. or b) Smith receives 50% of the operating income to BBS (if positive) from the one day seminar and no other payments. Comment on the results of a) and b)

c) Smith gave the seminar at BBS in 2007 when 60 executives attended and in 2008 when 90 delegates attended. How much was Smith paid by BBS for the one day seminar if: i) In 2007, the regular compensation package applied and ii) In 2008 Mr Smith shared in 50% of BBSs net operating income from the seminar (Assuming that the R 2 600 charge per executive attending and BBSs fixed and variable costs are the same each year).

CASE 4 BUDGETING AND CASH CONTROL 45 Minutes

XYZ (Pty) Ltd intends starting production on 1 January 2010, to manufacture a single product which has a material cost of R 20 per unit. Sales and production for the first four months of next year have been budgeted as follows: SALES UNITS January February March April 6,000 6,000 9,000 15,000 PRODUCTION UNITS 10,000 10,000 12,000 12,000

The initial purchase of direct materials will take place in December 2009 in preparation of starting production in January 2010. Thereafter the inventory of direct materials will be kept at a quantity sufficient for one-half of next months production requirements. It is expected that three quarters of each months purchases will be paid for in the month of purchase and the balance paid in the following month. A 2 percent cash discount will be taken on all purchases of direct materials. The selling price of the product is R 50 per unit. Collections are expected to made as follows: 80% in month of sale 10% in the month following the sale 9% in the second month after the sale 1% is to be regarded as uncollectable In order to meet the production levels required, the company has budgeted to spend R 120,000 on capital equipment. The purchase will be recorded in February 2010 and will be paid in March 2010.The equipment will be depreciated over 60 Months. R2,000 per month, 10 months in 2010. REQUIRED: 1) Schedule for the months of January,February and March: a) The rand value of material purchase requirements b) The rand value of material purchase payments c) Cash collections from trade debtors
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2) State, briefly, the purpose for which the Sales and Production budgets have been prepared, and indicate what other budgets would use figures produced by these budgets.

3) Indicate how: a) The budgeted capital expenditure will be reflected on the budgeted cash flow statement; income statement and/or budgeted balance sheet? b) The depreciation charge of will be reflected on the budgeted cash flow statement; income statement and/or budgeted balance sheet?

ANNEXURE A
MANAGEMENT ACCOUNTING ASPECTS

Cost-Volume-Profit Analysis Contribution Margin or PV Ratio = Contribution Margin Sales

Sales

Variable expenses + fixed expenses + profit

Break -Even Units

Fixed expenses Contribution per unit Total sales - breakeven sales Total sales - breakeven sales Total Sales

Margin of Safety

= =

Margin of Safety Ration

Degree of operating leverage

Contribution margin Net Income PV Ratio x Margin of Safety Ratio

Profit Ration

Profit Sales

or

Profit

PV Ratio x ( Total sales - Breakeven sales)

Cost Behaviour Variable rate Fixed Cost = = Change in cost / Change in activity Total cost - Variable cost

Y = a + bx

where

Y= a= b= x=

Total mixed cost Total fixed cost Variable cost per unit of activity Level of activity

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Variable Costing Absorption costing Direct Materials Direct Labour Variable manufacturing overhead Fixed manufacturing overhead Product Costs

Selling & Admin Expenses

Period Costs

Variable Costing Direct Materials Direct Labour Variable manufacturing overhead Product Costs

Fixed manufacturing overhead Selling & Admin Expenses

Period Costs

Standard Costing Material Variances Material Usage Variance Standard Quantity Minus Actual Quantity Material Price Variance Actual Quantity Minus Actual Quantity

X X X X

Standard Price Standard Price Standard Price Actual Price

Labour Variances Labour rate variance Actual Hrs Minus Actual Hrs Labour Efficientcy variance Actual Hrs Standard Hrs

X X

Act Rate Std Rate

X X

Std Rate Std Rate

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ANNEXURE B

INTERCHANGABLE ITEMS Please note: Often there are terms used that are interchangeable. This list is not exhaustive, there may be others.

Sales Gross Margin Expenses Net Profit Stock Accounts Receivable Accounts Payable
Balance Sheet Profit & Loss Account Income Statement

= = = = = = =
= = =

Turnover Gross Profit Overheads Net Operating Income Inventory Debtors Creditors
Statement of Financial Position Income Statement Statement of Comprehensive Income

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